[This post is a response to the estimable Geordie Guy's Tumblr post on Netflix/Arrested Development. I'd have obviously posted this as a comment on his original post, but Disqus would not let me (having signed up for a commenter account with Disqus it allows me to comment on seemingly most other Tumblr blogs except Geordie's. If I can ever get it working I will post it there and delete this)].
The background is that Netflix, the USA-based over-the-top video provider with 24m subscribers is producing a new series of Arrested Development, to be made available exclusively to their subscribers.
Geordie’s post in summary:
Starting in 2013, yet another copyrighted creative work will be screened exclusively to consumers of a particular [service] and exlusively to those who live in the contiguous 48 states of the USA.
[A]fter this, the rest of the world or those Americans who are not Netflix customers, will access the same creative work by infringing on they rights holder’s copyright.
The studio executives and rights holders will continue to be bewildered as they make less money, year after year. Some rights holders and studios will cease making copyrighted works like this, and will bitterly blame piracy for the now absent profitability.
This post makes a number of assumptions:
1. That Netflix don’t know what they’re doing. Netflix’s strategy in developing Arrested Development and the David Fincher-Kevin Spacey project House of Cards is not to drive revenue, it’s to drive subscriber footfall. It’s a loss-leader. Furthermore this strategy makes enormous sense. With licensing costs going up, offering exclusive, unique, desirable content is one of the few ways left to turn a profit in today’s content marketplace: it’s the HBO strategy, the BSkyB strategy, the Foxtel strategy, and it’s a proven one.
2. That Netflix will not make this content available outside the USA. With the NBN well and truly on the way Netflix are reportedly in talks with local ISPs to set up an Australian operation in the next 12 months. I would put the possibility of a local Netflix by 2013 at better than 50%. Even if they don’t open an operation it could well be that they license iTunes to sell day-after episodes outside of the US. (More likely, however that they’ll shoot for TV licensing and DVD sales, as I’ll explain).
3. That Netflix would actually make more money by going day-and-date with the USA. Based on the DVD sale rate and the ABC2 broadcast audience, factoring in piracy, Arrested Development’s true fan base in Australia is realistically less than 50k. For newer shows like Community, Treme, The Walking Dead, Parks & Recreation, it’d be 20k maximum. It might be hard to believe when you pay attention to the connected, savvy, early-adopter hyper-consumers on Twitter, but the segment who are fans of brand-new TV from the USA is an incredibly small niche – even in the States the audience for shows such as this is considered pretty niche.
If you took the option of selling Arrested Development direct, day-and-date, worldwide, with a video-on demand offering you’d stand to make $800k revenue at most (approx $17 per season, based on 13 episodes x $1.20 each). And that’s not taking into consideration the marketing costs of reaching and converting those 50k fans, and overheads. You’re left with a figure so tiny that it’s no wonder studios might not bother.
Instead, they prefer to have one licensing conversation with an overseas TV network and take the money. In that instance, for a niche property like Arrested Development it can actually be preferable to delay the content in other territories by 6 months. After the show has launched in the USA, and hopefully become a hit, the demand and potential audience in Australia will grow markedly due to word of mouth. The TV licensing deal will be much bigger – but if you’ve already sold the property into Australia through video-on-demand you will command a much lower licensing fee.
Sometimes this strategy doesn’t really work: The Walking Dead, first aired in the US in October 2010, will not screen in Australia until 2012, which is clearly too long, and much longer than Fox will have wanted. However, the second season of TWD will air day-and-date on Foxtel at the same time as the USA – this is a risk however, and Foxtel will need to over-invest in marketing to see a return.
4. That addressing copyright infringement is the key strategic issue for studios. Obviously, the possibility of consumers quickly and conveniently downloading and viewing copyrighted content at no cost is going to eat into profitability. You might assume, as indeed do a great many people, that this is therefore the overriding strategic issue that publishers must address. Then, when they don’t appear to, you might think that they’re stupid.
I can’t say too much about the legal aspects of the issue, but here are some points about copyright infringement, most of which are widely acknowledged:
- It is confined largely to one segment of the population. About a third of the population admit to it, with the 80/20 rule very much in effect within that third. That is, a very small portion of the population is responsible for the vast majority of infringement.
- Infringement does not appear to have increased over the past several years (at least not for movies/music).
- The vast majority of infringed video content can’t be considered a lost sale – in most cases, people infringe on content that they wouldn’t have an interest in spending money on anyway.
- Most importantly: beyond legal remedies it’s not clear that anything can really be done about infringement. Even if studios cut prices by 50% and rapidly expanded distribution hubs, it’s by no means clear the growth in sales to converted infringers would offset the decline in revenue from loyal buyers. There is no cheaper price than $0; why wouldn’t habitual infringers continue to opt for that?
The bigger challenge is making content that the vast bulk of consumers want to pay for, and delivering it to them in the ways that they want to watch it. Studios are definitely not ignoring this challenge, especially considering the margin on digital distribution is much higher than the margin on physical DVDs or Blu-rays. The Netflix/Arrested Development deal is actually a great example of this, and I wouldn’t be surprised if it doesn’t come to Australia as well. Yes, it won’t immediately address infringement; but so what?
There are actually plenty of digital distribution points in Australia: iTunes, Playstation Store, Foxtel On Demand, Telstra T-Box, Fetch TV, XBox Live, Quickflix, with launches by YouTube, Netflix, Amazon, LoveFilm, and perhaps physical retailers all likely just around the corner. Hollywood studios have launched a new streaming standard called UltraViolet, which should increase the value of owned content, and which will launch in Australia at some point.
But in all of these instances studios are at the mercy of distributors (although some, like Warner Bros, are experimenting with selling direct) who aren’t moving as aggressively as they’d prefer. And distributors are at the mercy of their customers, who aren’t telling them they want to migrate to digital en masse, despite what you may think if your research is purely Twitter-based. 30% of Australian households don’t even have broadband, and only a subset of those have a decent-sized download limit. 95% have a TV set and a DVD player.